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Wednesday, January 30, 2002

By Len Boselovic, Post-Gazette Staff Writer

Shares of PNC Financial Services Group fell 9 percent yesterday after the bank, under pressure from federal regulators, reduced its 2001 earnings by $155 million, or 53 cents per share.

The decision heads off a dispute with the Federal Reserve Board over the way the bank accounted for a small portion of the $12 billion in loans moved off its balance sheet last year as part of a restructuring.

As a result of the restatement, PNC's net income for 2001 dropped to $412 million, or $1.38 per diluted share. It previously reported 2001 net income of $567 million, or $1.91 a share.

"We felt this was appropriate for this small group of loans," PNC Vice Chairman Walter Gregg said. "Obviously, these kinds of things are getting a lot more scrutiny these days than perhaps they were getting six months ago."

PNC also said it did not expect the restatement to have any material impact on operating results for 2002, and remained comfortable with the median First Call analyst estimate of $4.60 per diluted share.

PNC shares closed at $56.08, off $5.79. More than 6.1 million shares changed hands, six times the average daily volume.

The sharp reaction comes at a time when investors are increasingly wary of corporate accounting practices, particularly in light of Enron's bankruptcy.

The assets in question were sold to a separate company owned by PNC and a major insurance company that bank officials declined to identify. The Federal Reserve had advised PNC that its interest in the venture was improperly classified as securities held for sale. That's the accounting method Ernst & Young, PNC's auditor, had suggested using.

After PNC heard from the Federal Reserve, Ernst & Young recommended getting an opinion from the Securities and Exchange Commission, advice PNC took to heart. However, before the SEC weighed in, PNC decided to make the changes recommended by the Federal Reserve Board. As a result, its overdue loans and other nonperforming assets increased by $125 million to about $393 million.

PNC said bank regulators and the SEC were investigating the transactions.

"We don't really know at this point what effect this action will have on those inquiries," Gregg said.